Sina’s $68 Valuation: Key Drivers & Potential Risks

Sina (NASDAQ:SINA) is a Chinese online media company which mainly provides services through Sina.com for online news & content, Weibo.com – a microblog, and Sina Mobile for mobile value added services. The company earns revenues through display advertising on its websites, mobile value added services and other fee based services including paid email services and casual games.

Sina has historically seen double-digit growth in its top line, except for a marginal decline in 2009. Its revenues in 2011 stood at $483 million, and we believe this figure will increase to $903 million by the end of our forecast horizon. We estimate that a continuous increase in revenues from display advertising driven by increased monetization of the Weibo platform and other paid services will contribute to Sina’s growth in the long-run.

While Sina has witnessed some decline in gross margin in the past few years, we feel that it will stabilize at around 52% once the investment in Weibo starts paying off, then Sina could realize higher revenues at a more stable cost base. However government regulations, uncertainties in the Chinese online advertising market, and frequently changing operator policies are possible roadblocks that can limit its future growth.

In this article we evaluate Sina’s key business segments and discuss some important trends and risk factors that impact these divisions.

Display advertising accounts for around 75% of Sina’s revenue and represents nearly 65% of our price estimate for the company.

While the Chinese online display advertising market is growing at a rapid pace, Sina’s share in the market has declined from a high of 14.1% in 2007 to 7.7% in 2011. Sina aims to capitalize on its micro blogging website, Weibo, to increase its share in the online display advertising market. While the company is incurring huge investments to develop Weibo, it has been unable to reap significant payoffs from the platform so far. Advertising revenues from Weibo accounted for only 16% of Sina’s total advertising revenues in Q3 2012.

Sina is making various efforts to monetize the growing popularity of Weibo. In April 2012, it introduced the Weibo display advertising system for brand advertising. This system allows advertising to be more targeted and relevant for users. In Q3 2012, Sina targeted small and medium-sized enterprises by incorporating this advertising system in a news feed.

Sina is also enhancing its mobile platform to leverage the rising adoption of smart phones in China. In July 2012, it partnered with Baidu to incorporate Baidu search in its mobile platform. In December 2012, it collaborated with AutoNavito to improve social networking and navigational aspects of its current mobile offering. We feel the above factors will help Sina increase revenue contribution from Weibo, which will help stabilize its decreasing share in the Chinese online advertising market.

Potential Threats – We feel that factors such as adverse government regulations and uncertainties in the Chinese online advertising market might restrict Sina’s growth in the Chinese online advertising market. The Chinese government has stringent regulations for online businesses in China, and major networking sites such as Facebook and Twitter are banned in the country. If the government introduces some adverse policy changes, it could hinder the growth of the online advertising market, which could negatively impact Sina.

The online advertising market in China is still at its nascent stage of growth. Since advertisers have limited experience in utilizing internet as an advertising medium, they have traditionally not spent a large portion of their advertising expenditure on web-based advertising. Increased usage of advertising blocking software may also lead advertisers to switch to other traditional modes of advertising. This can negatively impact Sina’s display advertising business.

Mobile Value Added Services

Through mobile value added services, Sina allows its users to receive news and information, download ring tones, mobile games and pictures, and participate in dating and friendship communities. MVAS accounts for around 18% of Sina’s revenues and represents 4% of our price estimate for the company. Sina’s MVAS revenues have been declining since 2010. It relies on Chinese telecom companies (including China Mobile, China Unicom and China Telecom) to offer these services to users. Since these companies keep changing their policies regularly, it leads to an adverse impact on Sina’s MVAS business.

On account of these frequent policy changes and stiff competition within the MVAS business, we expect Sina’s MVAS revenue to continue declining till the end of Trefis forecast period.

Other Paid Services

Other paid services include paid email services, online games, eReading, etc. These paid services account for around 6% of Sina’s revenues and contribute 6% to its value, as per our estimate. Other paid services’ revenues have registered high growth since 2008. We expect this trend to continue over our forecast period due to increasing internet penetration in China and rising popularity of online games. The rising popularity of Weibo further bodes well for this segment as Sina also provides games through its Weibo platform.

Intense competition from other leading gaming companies, such as Tencent and NetEase, and stringent government regulations pose a threat for Sina’s growth in this segment.

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